Risks in Banking Management
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Questions and Answers

What is legal risk primarily associated with?

  • Negative public opinion and reputation damage
  • Failure to maintain business operations
  • Unenforceable contracts and lawsuits (correct)
  • Financial loss due to regulatory changes

    • Which of the following is a component of compliance risk?

  • Inefficient internal controls
  • Failure of market strategies
  • Legal sanctions and financial loss (correct)
  • Loss of client trust and loyalty

    • What does risk management fundamentally aim to establish?

  • Innovative client products and services
  • Controls to minimize the possibility of loss (correct)
  • New market strategies to increase profit
  • Regulatory compliance to avoid penalties

    • What factor is NOT considered a source of risk in banking?

    <p>Client Satisfaction Levels</p> Signup and view all the answers

    Who is responsible for managing risks within a banking institution?

    <p>Responsibilities vary according to position</p> Signup and view all the answers

    What is a common operational risk event related to deposit taking?

    <p>Misposting - wrong mode of payment</p> Signup and view all the answers

    Which of the following issues could jeopardize the validity of a borrower's loan documentation?

    <p>Incomplete KYC documents with erasures</p> Signup and view all the answers

    What should always be included in a disclosure statement regarding service charges?

    <p>Erroneous booking of service charge</p> Signup and view all the answers

    What is a potential error when dealing with post-dated checks?

    <p>No payee indicated</p> Signup and view all the answers

    What percentage of risk is associated with Execution, Delivery & Process Management?

    <p>36%</p> Signup and view all the answers

    What might be a consequence of inaccurate borrower information?

    <p>Overstatement of loanable amount</p> Signup and view all the answers

    Which risk category has the lowest percentage according to the distribution?

    <p>Damage to Physical Assets</p> Signup and view all the answers

    What commonly occurs due to a slow internet connection in banking operations?

    <p>Double posting of transactions</p> Signup and view all the answers

    What is the combined percentage risk of Internal Fraud and External Fraud?

    <p>27%</p> Signup and view all the answers

    What is a requirement for the completeness of the application form?

    <p>All fields must be filled up</p> Signup and view all the answers

    Which of the following categories represents the highest risk in Lending Operations?

    <p>Deposit Taking</p> Signup and view all the answers

    What improper element can affect the signing validity of guarantees?

    <p>No signature of pledgor</p> Signup and view all the answers

    What percentage of risk is assigned to Human Resource Management?

    <p>6%</p> Signup and view all the answers

    What does PAR refer to?

    <p>Total outstanding principal amount of loans with installments due for 1 day or more</p> Signup and view all the answers

    In the risk distribution, which of the following processes represents 15% of risk?

    <p>Management Information System</p> Signup and view all the answers

    When is a microfinance loan considered performing after the contractual due date?

    <p>After it has become past due</p> Signup and view all the answers

    What defines a loan as non-performing after restructuring?

    <p>If it was previously classified as performing</p> Signup and view all the answers

    What is the percentage of risk related to Compliance Management?

    <p>6%</p> Signup and view all the answers

    Which risk category is associated with a percentage of 36%?

    <p>Execution, Delivery &amp; Process Management</p> Signup and view all the answers

    What is indicated by DPD?

    <p>The number of days an account is overdue</p> Signup and view all the answers

    What time frame is specified for reporting risk events verbally?

    <p>Within 24 hours</p> Signup and view all the answers

    What does NPL stand for?

    <p>Non-Performing Loan</p> Signup and view all the answers

    Which of the following is a primary responsibility in risk management?

    <p>Detection of risk events</p> Signup and view all the answers

    How long does one have to report a risk event in writing?

    <p>Within 3 days</p> Signup and view all the answers

    What is the primary purpose of conducting credit analysis?

    <p>To determine the likelihood that the borrower will honor his obligations</p> Signup and view all the answers

    What must be maintained regarding loan documentation within a bank?

    <p>A comprehensive register of all loan documentation held</p> Signup and view all the answers

    Who must sign all loan documents on behalf of the bank?

    <p>At least two authorized officers/employees</p> Signup and view all the answers

    What does the early warning signal in credit monitoring entail?

    <p>Identifying potential defaults before they occur</p> Signup and view all the answers

    In treasury management, what is crucial before making an investment?

    <p>Determining the benefits to be derived from investments</p> Signup and view all the answers

    What protocol must be followed for the removal of any loan document from storage?

    <p>Two members of staff must authorize the removal</p> Signup and view all the answers

    What is a key aspect to consider regarding the 5 C's of credit?

    <p>The ability and willingness to pay should be a focus</p> Signup and view all the answers

    Why is it essential to have a pro-active collection system?

    <p>To prevent asset depletion before it occurs</p> Signup and view all the answers

    Study Notes

    Risks in Banking

    • Legal Risk: Arises from unenforceable contracts, lawsuits, or adverse judgments.
    • Compliance Risk: Risk of legal or regulatory sanctions, financial loss, or reputational damage due to failure to comply with laws, regulations, codes of conduct, and standards of good practice.
    • Reputational Risk: Risk arising from negative public opinion.

    Risk Management

    • Risk management is a systematic approach to identifying, measuring, monitoring, and managing business risks.
    • It involves establishing controls to minimize the possibility of loss.

    Risk Identification

    • Possible sources of risk include:
      • Execution, Delivery & Process Management
      • Clients, Products, and Business Practices
      • Business Disruption and System Failures
      • Damage to Physical Assets
      • Employment Practices
      • Internal Fraud
      • External Fraud

    Risk Assessment

    • This step involves identifying potential risks and evaluating the likelihood and impact of each risk.

    Control Assessment

    • Minimum Internal Controls include:
      • Loan Documentation:
        • Signed on behalf of the Bank by duly authorized officers.
        • Signed by at least two officers/employees of the Bank.
        • No lone document should be signed by one officer acting alone.
        • All original Loan Documents should be kept in fireproof safe custody.
        • A Register of Loan Documents should be maintained.
        • Two members of staff are required to remove any document.
        • Working duplicates/shadow copy should be held on the Credit File.
      • Investments: Major investments must be approved by the Board of Directors (BOD). Treasury Management should assess and identify the capabilities and stability of financial institutions before recommending investments to the BOD. Proper monitoring of maturing obligations is crucial.

    Credit Risk Management

    • The Bank's credit risk strategy is approved by the Board and reviewed annually or when needed.
    • Compliance with BSP Circular 855 is required.
    • Credit Analysis is performed to determine the borrower's ability and willingness to pay.
    • Verification and validation of borrower information is essential.
    • The "5 Cs of Credit", Borrower's Risk Rating (BRR), pre-approval/post-approval monitoring mechanisms, record keeping, early warning signal identification, pro-active action, and efficient collection systems are crucial components of Credit Risk Management.

    Operational Risk Management

    • Compliance System:
      • Full-time Chief Compliance Officer
      • Library of Regulations
      • Continuous Trainings/Seminars
      • Compliance Testing
      • Reporting
    • Deposit Taking:
      • Undetected Misposted Deposits
      • Fake Bills
      • Unauthorized Withdrawals of Depositors’ Funds
      • Losses
    • Lending Operations:
      • Inaccurate Borrower Information
      • Falsified Collateral Documents
      • Incomplete Loan Documentation
      • Overstatement of Loanable Amount
      • Unremitted Loan Collections

    Common Operational Risk Events

    • Misposting (wrong account, incorrect amount, wrong mode of payment).
    • Depositing checks or cash directly as loan payments instead of depositing to a Savings Account.
    • Double posting due to slow internet connections.
    • Erroneous inputs (first amortization date, loan term, UID for GG payment, ADA setup).
    • Posting payment without remittance.
    • ATM shortages.

    Risks in Loan Documentation

    • KYC Documents:
      • Erroneous erasure, missing signatures of branch personnel.
    • Application Forms:
      • Missing fields.
      • Lack of recommended amount, loan term.
    • GG - PIS:
      • Missing pledge signature.
    • Disclosure Statement:
      • Erroneous booking of service charges.
    • Post-Dated Checks:
      • No payee indicated.

    Common Errors in Loan Releases

    • Erroneous account opening, loan amount, interest rate, or service charge selection.
    • Erroneous loan term, scheme, or industry tagging.
    • Incomplete or un-signed uploaded documents.
    • Improperly set-up UIDs or insufficient days for GG payments.

    PAR (Portfolio at Risk) and NPL (Non-Performing Loan)

    • PAR: Refers to the total outstanding principal amount of loans that have installments due for at least one day.
    • NPL: Refers to the total outstanding principal amount of loans that have installments due for at least one day that are considered non-performing.
    • DPD (Days Past Due), PD (Past Due): An account is considered past due if any principal or interest payment is not made on the due date.

    Reporting Risk Events

    • Responsibility of Employees:
      • Detection: Identify the risk event.
      • Mitigation: Take action to minimize the impact of the risk event.
      • Reporting: Report appropriately.
      • Prevention: Implement measures to avoid future occurrences of the risk event.
    • How to Report: Online Reporting (1VB RS).
    • Where and When to Report: Risk Management Department (within 24 hours if verbal; within 3 days if written).

    Risk Distribution

    • Business Disruption and System Failures: 19%
    • Internal Fraud: 21%
    • Clients, Products, and Business Practices: 7%
    • Damage to Physical Assets: 3%
    • Employment Practices: 6%
    • External Fraud: 8%
    • Execution, Delivery & Process Management: 36%

    Risk Distribution on Major Processes

    • System and Methods: 6%
    • Compliance Management: 18%
    • Strategic Planning: 2%
    • Risk Management: 7%
    • Operations Support: 14%
    • Management Information System: 15%
    • Human Resource Management: 6%
    • Internal Audit: 6%
    • Legal Services: 6%
    • Lending Operations: 28%
    • Corporate Communication: 6%
    • Deposit Taking: 18%

    Whistleblower Program

    • Empower bank employees to report wrongdoing or improper conduct to senior management.
    • Provides a safe and confidential avenue for reporting concerns.

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    Description

    Explore the various risks involved in banking, including legal, compliance, and reputational risks. This quiz also covers the essentials of risk management, risk identification, and risk assessment processes. Test your understanding of how banks navigate these challenges.

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